Market Insider: Wednesday Look Ahead
The Obama Administration's plan to stem foreclosures and the Fed's latest view on the economy are two powerful catalysts for markets Wednesday.
President Barack Obama is expected to unveil details of his mortgage plan at 12:15 p.m. in Arizona. The housing plan will use at least $50 billion from the financial bailout funds.
Stocks sold off Tuesday on worries about the global economy even as President Obama signed the historic $787 billion stimulus package. At the same time, the "fear trade" was back and spanned all markets. Buyers rushed into the safety of Treasurys, the dollar and gold, and shunned economically sensitive commodities and stocks. Credit spreads widened.
Markets were also concerned Tuesday about the state of the auto industry. General Motors and Chrysler submitted viability plans to Treasury after the close Tuesday. GMwas seeking up to $16.5 billion in additional loans and requested $2 billion next month to avoid bankruptcy. Chrysler said it needed an additional $5 billion.
The Dow fell 297 points, or 3.8 percent to 7552,.60, within 0.31 points of its 5-1/2 year low of Nov. 20. The S&P 500 fell 37, or 4.6 percent to 789, its lowest close since Nov. 20. The S&P though is still nearly 5 percent above the intraday low of 752 reached that day. The Nasdaq was down 4.2 percent at 1470 and is still 11.7 percent above its Nov. 20 low.
"Could we break the lows? That's the question. We could at some point. I just think the stimulus plan puts a little bit of a floor in short-term so I think we're going to trade range-bound," said Robert Harrington, head of the equities block desk at UBS.
Financial stocks were the worst performers, losing 9.8 percent. "The financials are in the soup ... They're not calling it nationalization, but the market is convinced it's happening," said Harrington of the bank stocks.
Traders say the market remains skittish as it waits for more details on the Treasury's bank bailout plan, not expected for several weeks.
Another sour note for the markets came Tuesday when the Securities and Exchange Commission charged Stanford Financial Group executives, including founder Allen Stanford, with massive ongoing fraud. The SEC, which immediately put the firm in receivership, claimed it fraudulently sold $8 billion in high-yield certificates of deposit. The SEC also named Stanford International Bank, which is based in Antigua and has 30,000 clients in 131 countries.
The Fed Wednesday releases the minutes of its latest meeting and its economic forecast at 2 p.m. But traders will be particularly interested in comments from Fed Chairman Ben Bernanke who speaks at the National Press Club at 1 p.m. He will also take questions. Traders are interested in what the Fed minutes or Bernanke might say about the Fed's plan to buy Treasurys and other instruments.
Other economic news Wednesday includes housing starts and building permits, as well as January's import and export prices, all at 8:30 a.m.. Industrial production is reported at 9:15 a.m. Cleveland Fed President Sandra Pianalto speaks at 9 a.m., and Chicago Fed President Charles Evans speaks about the economic outlook at 1:30 p.m.
Deutsche Bank chief U.S. economist Joseph LaVorgna said the market would respond well to more details from the Fed on quantitative easing, but he doubted there would be much on that in the Fed minutes.
LaVorgna said the housing plan could be very important to markets Wednesday, but key to the plan working will be whether there is a component to reduce the principal for mortgage holders whose loans are underwater.
"I think the devil will be in the details on the housing modification. If it turns out that it's just lengthening the loan and lowering peoples' payments, it's not enough," said LaVorgna.
"Foreclosures will go up if you can't structure it in a way to reduce principal and get people to have some equity. Then the chances they foreclose is much less. The literature is not particularly encouraging on lower payments and longer loans," he said.
Traders said markets reacted in part Tuesday to economic news released during the Monday holiday, which showed that Japan's GDP had tanked more than expected. Japan's GDP fell 12.7 percent at an annual pace from October to December, its most rapid contraction in 35 years. Also worrying markets was a report from Moody's that said banks could be hit by the recession in Eastern Europe.
"It seems to me like you're going to have a lot of restructuring of debt," said Harrington.
LaVorgna said this downturn is different than others in that it has spread to all corners of the world. "Everything that is been happening globally argues for a very coordinated and aggressive approach from policy makers and unfortunately there's nothing we've seen yet that says we're going to get it," said LaVorgna.
Oil Getting Drilled
Crude oil Tuesday tumbled $3.58 per barrel or nearly 7 percent to $34.93 per barrel, its biggest drop since Jan. 27. For February, it is now down 16 percent. Gasoline on the NYMEX slipped $0.0945 per gallon or nearly 8 percent to $1.1118.
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"The economic malaise continues," said John Kilduff, senior vice president at M.F. Global. "The equity market's ills are definitely affecting the oil outlook. We're just not seeing any hope right now for demand to pick up and lift these prices."
While gasoline fell on the NYMEX, it continues to rise at the pump. "The price rise should stop dead here at the pump. I look for them to go lower, particularly if crude breaks the $30 mark, which could happen this week. We could see real pressure on it through the end of the week, given the supply situation in Cushing," Kilduff said. The NYMXEX front month contract expires Friday and traders recently have been selling ahead of expirations because of oversupply at the Cushing, Okla. delivery point.
Many commodities fell Tuesday, as the the dollar surged. The Reuters-Jefferies CRB, which tracks 19 commodities, fell 4.6 percent to a 6-1/2 year low. Gold though defied the trend, rising again as the flight-to-safety trade propelled buyers into the precious metal and U.S. Treasurys. Gold jumped $36.50 per troy ounce, or 2.7 percent to $967, seven month high.
Earnings expected ahead of the bell Wednesday include Deere, Comcast, Constellation Energy and Rogers Communications. After the bell earnings are expected from Hewlett-Packard , CBS and Whole Foods .
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